SCGLY Societe Generale (PK)

By Simon Clark 

The chief executives of some of Europe's biggest banks are hoping regulators will soon let them resume cash dividend payments, easing pressure on their flagging share prices. Spanish lender Banco Santander SA is even planning to pay a dividend in shares this year as an alternative.

The European Central Bank and the Bank of England told banks to stop paying cash dividends earlier this year to preserve capital to fight the impact of the coronavirus pandemic. But the policy has deterred investors and helped send the Stoxx Europe 600 Banks index down 41% in 2020 compared with an 11% fall in the broader Stoxx Europe 600 index.

"It will be key for our shareholders to have more visibility in terms of capital distribution in 2021," UniCredit SpA Chief Executive Officer Jean Pierre Mustier told the European Banking Federation on Oct. 1. "What we need is to be attractive for investors."

Barclays PLC Chief Executive Jes Staley and Santander Chairman Ana Botín last week told the Institute of International Finance that it was important to resume dividend payments. Société Générale SA Chairman Lorenzo Bini Smaghi has said regulatory restrictions on dividends have caused European bank shares to fall more than their U.S. counterparts.

The ECB is likely to make an announcement before the end of the year, analysts said. "Our call is that the ECB will lift the dividend ban in the fourth quarter. This will set a path for banks with conservative provisions and sufficient buffers to reinstate dividends in early 2021," Jefferies analysts wrote this month. "Banks that have applied a conservative approach to credit provisioning will be in a good position to convince the regulator about the stability of their profits."

Investors will watch closely as banks announce third-quarter results for evidence they are strong enough to pay dividends when the green light finally comes. Speaking at the WSJ CEO Council Summit on Oct. 6, Santander's Ms. Botín acknowledged that European banks are, "to put it mildly, out of favor" but said the sector was doing better than many think. She said that in the U.K., 70% of the mortgage payment holidays Santander extended have expired and of the customers who received them, only 1% aren't paying. Of the payment holidays Santander extended to European consumer customers, 84% have expired and of those 4% are credit-impaired, she said.

"I am not saying we are totally out of the woods but the numbers that we are seeing are actually better than we expected," Ms. Botín said.

Santander's shareholders will meet later this month to decide whether to receive the 2019 dividend in new shares. The bank said it plans to return to paying cash dividends "as soon as the market conditions return to normal."

European central bankers asked lenders to halt cash dividends and share buybacks as they worked with finance ministries to provide billions of dollars of support to banks and economies. Andrea Enria, the ECB's chief banking supervisor, told the European Banking Federation on Oct. 1 that financial support from governments, including guaranteed loans, equaled about 20% of the gross domestic product in the eurozone area.

"It would have been very difficult to let this capital flow out of the sector," Mr. Enria said. "This is an exceptional measure which is justified by exceptional circumstances where we have stopped our economies, stopped the factories, stopped the schools and is temporary."

Canceling dividends did help banks to shore up their balance sheets. The capital ratios of the U.K.'s biggest banks improved in the first half of 2020 even though they were hit with GBP18 billion, equivalent to $23.3 billion, of impairment losses, according to the Bank of England.

But the cancellations displeased many shareholders -- particularly Hong Kong-based investors in HSBC Holdings PLC. The London-based bank, which makes most of its profit in Asia, said in August that it faced "lawsuits that have been and may continue to be brought in connection with our cancellation of the fourth interim dividend for 2019."

The banking sector accounted for 14.6% of dividends paid by European companies in 2019 -- the largest share -- down from 22.4% in 2007, according to UBS Group AG.

Write to Simon Clark at simon.clark@wsj.com

(END) Dow Jones Newswires

October 19, 2020 05:44 ET (09:44 GMT)

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